StimCity Broadband--WINS and INS

Well, not exactly; but the good part is that the agencies in question (the NTIA and RUS) can do a lot in a short period by relaxing, working patiently through applications, and focusing on the development of distribution rules  that work with the market to take some of the burden from the agencies.  Now I can certainly understand that, after 8 years of policies sold under the hazy, undefined, rubric of the virtues of the so-called "free market" (I never understood what that term meant . . . a market with no rules, or no enforcement of existing rules?), the new policymakers at the NTIA, the RUS, and the FCC might be tempted to turn away completely from markets, and market mechanisms, as a way to implement policy.  This would be a mistake. Instead, today's policymakers should familiarize themselves with the strengths, as well as the shortcomings, of market-based distribution mechanisms, then take a tip from mixed martial arts legend Rickson Gracie, and "flow with the go."  In short, look for ways to use existing markets (and market mechanisms) to the consumer's benefit.

If I could give two pieces of advice to agencies handing out grant money, they could be easily remembered as "WINS" and "INS."  Using these two existing constructs/concepts, the agencies could--at least for the first round of funding--maximally leverage the effect of taxpayer-funded broadband grants, and minimize concerns about "open networks" and waste, fraud, and abuse.  So what are "WINS" and "INS"?

"WINS" is an abbreviation for Wholesale INfrastructure Suppliers/projects.  In other words, for the first round, at least, agencies should focus on projects managed by known wholesalers--including the wholesale, out-of-incumbent LEC-region, operations of large carriers like AT&T and Verizon.  In the interests of full disclosure, AT&T and Verizon are consulting clients of mine.   Nonetheless, outside of their incumbent LEC regions, these companies are no more regulated than any other competitive carrier, and have the same incentives to stimulate output as any other competitor.  Moreover, these companies have large cap-ex budgets (both, much larger than the total grant amount in the stimulus package--so they should be good at accurately handling large project budgets), both are Networxx (the government-wide telecom contract) vendors, so they have a substantial out-of-region presence, and it would be simply foolish for agencies not to take advantage of these competitive fiber assets.  I'm not saying these companies should be favored, just not excluded.

On the wireless side, since the "bottleneck" facility is the cell site, the agencies can put more spectrum "on the street" by focusing grants on tower companies.  These wholesale infrastructure investments can support multiple retail wireless carriers, and also entice entry by wholesale wireless backhaul providers. 

Whether wireless, or wireline, Wholesale INfrastructure Suppliers produce WINS for consumers and grantor agencies, because the natural incentive to stimulate output, possessed by all competitive wholesalers, substantially mollifies concerns about open network terms (competitive wholesale carriers, and customers, have been able to agree on mutually acceptable contract terms in most, if not all, unregulated markets).  Concerns over waste, fraud, and abuse are also substantially mitigated if the firms that are the focus of the first round of grant money are in the business of selling capacity to other carriers.  In the absence of market power, profits are maximized when asset/inventory turnover [i.e., "output"] is maximized.

The other term "INS" is a mnemonic device to refer to "insurance." Even if recklessly written, unfunded, "insurance" (by AIG) is partly to blame for our current economic mess, we shouldn't let the concept of responsibly-written insurance prevent us from using risk transfer as a means to maximize private investment on a given amount of public funds.  While the statute specifies that the funds be used as "grants", the Recovery Act does not prevent these grants from being used to ensure a specific level of wholesale or retail demand (or fixed costs) over the agency-determined economic life of an investment. Many broadband projects--especially in "unserved" areas will still be too risky to attract sufficient private capital to get a complete project funded.

For example, in yesterday's post I discussed the "remote tandem" wholesale business model, wherein a private "middle mile" fiber carrier may choose to deploy fiber to pick up transmission demand from multiple remote (from a backbone)--but proximate to each other--aggregation sites.   The insurance concept can be easily illustrated using this model. 

Let us say that broadband wireline and/or wireless capacity to business and residential consumers in a rural area may be funded in large part by an agency grant; however, the "backhaul" from the aggregation point to the Internet backbone might be 100% funded by a private wholesaler if the government could ensure that 80% of projected demand at the remote aggregation point materializes.  Without that assurance, the additional fiber may not be extended to the remote aggregation site(s) at all, but the incremental outlay of taxpayer funds may be relatively limited.  To continue the example, let us assume that a fiber backhaul provider would like to see $100/month in demand from the newly-funded broadband community in order to justify a build, but the backhaul provider agrees to undertake the build, and provide service--at cost--if the community only produces $80/month in demand.  If, in reality, though, the community only manages to produce $60/month in demand, the agency can make a temporary grant of $20/month until the community's demand increases, or until 20% of the long haul provider's fixed costs are covered.  Even in "bad" cases, agencies can use the concept of "insurance" to attract multiples of the grant money through additional investment from private capital sources. [Note: for the first round of grants, projects with questionable profitability on a variable-cost-only basis, should not be considered because these projects risk expanding the USF long-term.  Such projects can only be prudently undertaken in consultation with the FCC.]

Again, the concept of using grants to "insure" incremental levels of private investment, creates fewer complications in terms of writing "open networks" rules, because the two primary parties (for whose contract the agency is acting as insurer) have their own incentives to make sure that the project produces maximum output.  The risk of waste, fraud, and abuse is also mitigated because the agency is, in all likelihood, the party with the lowest amount of risk exposure. 

So, if the NTIA, RUS, and FCC must cooperate to start getting grant money out sooner than they might otherwise be comfortable, the agencies can minimize their trepidation by observing this simple mnemonic rule (at least for the first wave of funding):  "Grant money is best used on WINS, and it can be multiplied by giving broadband providers more INS."